Monday, August 18, 2008

Auction Rate Securities Settlements Exclude Some Holders

The New York State Attorney General's effort to force buybacks by Wall Street banks and brokers of auction-rate securities may not help some individual and institutional investors.

The New York AG reached agreements with Citigroup Inc., UBS AG, Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp. to begin buying back $42 billion of the debt they sold directly to individuals. The accords don't extend to investors holding most of the remaining $160 billion bought through mutual fund firms or brokers that didn't underwrite the debt.

Investors have been stuck in the securities, which are long-term debt that have interest rates typically set every seven, 28 or 35 days through periodic auctions, since the market collapsed in February. Dealers, who for two decades bought debt that went unsold at auctions, suddenly pulled back because of widening credit-market losses.

The market has shrunk to about $200 billion from $330 billion as borrowers refinanced the securities using other types of debt. Individuals are the biggest holders, followed by publicly traded companies, which own about $32 billion, according to Pluris Valuation Advisors LLC in New York.

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